Kering SA (KER) Earnings Call Transcript & Summary

Thomas. Just a further reminder, it's a Q3 revenue call. So it's not a full year '24 call. So we will not be able to give you all this indication, and it's not clearly the right call to do it. So I leave it to Jean-Marc, but just as a short reminder.

Yes. Nonetheless, you know that what we mentioned in some of the calls is that we are working to improve the efficiency of the communication at Gucci. And what we mentioned is that it's not only something that we can do by increasing the cost of the communication. There is also a question of reallocating the cost to be more efficient. I think that what we are working on is just to cover different layers of communication. It can be about typically a repeated communication to build a desirability around some icons. I mentioned the [indiscernible], but I could also mention the Jackie, these are the 3 icon bags. We can also invest, of course, in more seasonal campaigns. I mentioned the one-off the Fall/Winter '23, the one around the Ancora fashion show. We have also some specific campaign with typically the new Balenciaga campaign that you may have seen on the presentation with Kendall Jenner and Bad Bunny. We saw some impact, obviously, and which is a good also illustration that we want really to show how the Gucci positioning is about intersection of luxury and fashion, but we have also some more institutional communication investments. Typically, the 1 we have with the Cosmos exhibition that is now in London, and that will come to Japan in 2024 to celebrate the 60th anniversary of the brand in the country. All that with also some work to have some more KOLs and influencers with the recruitments of new influencers in China but also in Korea. That does contribute clearly to have some pressure on the lines of communication and marketing expenses. But it's really what we want to do, and that's the reason why we don't want to be too pushy on to -- clearly, too bullish on the EBIT side because what we expect is, of course, to regain some traction on the top line with some leverage, but that would be reinvested in some different lines of expenses, but clearly, communication is part of it. Price increase. It's something that we cannot comment on '24. You know that we had some tactical price increases during the year, but pure price increases, considering where the brand stands now, I think that's not clearly the right decision that we have been able, as you may have noticed already in H1, to absorb part of the inflation. And the gross margin has been quite well protected so far. And I guess that it should be the case by the end of the year. The combination of hedging and fixed, by the way, should help a little bit globally over the year. So as a result, I would say that it's not on the pricing strategy side that we bet on for 2023 and 2024. By the way, for the end of 2023, there is nothing we can really do now. It's more about 2024. And we have some other priorities and some other focus considering the positioning of our brands. And as you know, the elevation of the brand is contributing to the increase of the average selling price. It's not just a storytelling, the elevation of the brand because when we look at the performance of our brands in the higher segments of clientele or products, we see a real increase. It's not relative, it's in absolute terms. So we see that there is a good response of the market to the elevation of the brand. We had an impact on the average selling price. So to add on top of that, pure price increase, it's not part of our strategy or at least so far, and we will see what will happen going forward in 2024. As regards Creed, the question is not about saying if it's enough or too much or -- the point is more about if there is a hole in the portfolio and there is some opportunity. To be honest, we are not resuming exactly completely like that. I think that we have already very strong portfolio of brands. We have been able to add Creed because it's clearly part of the strategy to -- for expanding Kering Beauté and accelerating the development of Kering Beauté. And by itself, also Creed is a great brand with a huge potential. And when it comes to Valentino, obviously, it's really a -- so far, it's a 30% stake. But going forward, it should be a very nice addition to the portfolio of brands we have. And it's clearly an iconic brand on the market. And what we will continue to target is there would be some opportunity with this type of iconic brands. And obviously, we have also some firepower still to envisage M&A, but I think that we have already a lot of things to do with the existing portfolio, a lot of things to do in terms of execution of the strategy and short term, the focus is principally about that. We need also to work on the integration of Creed, which is super important to us. So let's say that so far, the priority is about organic growth and integration of Maui Jim and Creed.

The next question is from Edouard Aubin with Morgan Stanley.

3 questions for me. On Saint Laurent, so you talked about it, Jean-Marc. But if we look at the performance in the U.S. and Europe on an underlying basis, looking at the comp base, I mean, clearly, things have worsened in the second quarter and it's not just due to wholesale because I think you reported your first negative retail comp in basically a decade if you exclude the beginning of the pandemic. So what's kind of your analysis, apart from, obviously, the adverse macro and the exposure to maybe aspirational customers, kind of what's your analysis of the relatively brutal slowdown there? Have you chased sales too aggressively with the brand? Are you too dependent on leather goods? And so on and so forth. So I'd be curious to have your view on that. The second question is just to follow up on -- I think it was Thomas' question on the leverage at Gucci. So if we look at Gucci, your store network expanded quite a bit over the past 3, 4 years, a bit more than some of the other leading brands, which obviously is leading to some negative scissor effect and operating deleverage, as you mentioned. Can you share with us what you expect the sales density to be in for the year? I think you were about EUR 45,000 per square meter in '21, if my memory is correct. And what's your -- in terms of the strategy, in terms of the retail expansion, you talked about the opening of flagship in Paris and London. If we look over the next 18 months, what's your strategy there? Could you actually rationalize some of the store estate at Gucci there or not? And then sorry, lastly, again, just to follow up on -- again, I think it was Thomas as well on the advertising spend. If we look more broadly at the industry level, the cost to compete has been going up for the luxury goods industry in recent years. Maybe it's early days, and it's maybe too early, but when you talk with your colleagues at Kering, do they -- are they seeing some or expecting some moderation of A&P spend in the coming quarters based on kind of market intelligence? Are some of your competitors and peers becoming a bit more reasonable in terms of the spend behind the brands? That would be helpful.

Thank you very much, Edouard, for all your questions. You have mentioned already in your question, some very important factors explaining the performance of Saint Laurent. Besides wholesale, it's important to remind that, first of all, and I want to reiterate that the Houses geographical exposure is slightly over indexing. Western Europe and North America together, they represent something like 57% of the total sales, retail sales. And in fact, it's true that the brand has a good penetration with local and a lower contribution of tourism. And it's true that in the recent years when we think about the growth of the brand in the past few years, it has been also driven partly by aspirational clients, which is absolutely true. But still, if we look at where we are in Q3 '23, the CAGR, the average growth since 2018 is still at 16%, which is huge in the industry. So clearly, yes, the focus on brand elevation, that does encompass also a very strong discipline in terms of markdown activities in terms of exposure to certain channels. The fact that the recent launches in handbags were made at a price point which was quite high. And then we have recently launched some new items, new SKUs above EUR 3,000, EUR 3,500 retail price had an impact because when the client -- the aspirational clients are entering in the store, it's true that there are probably less products to buy. It's true also that -- something to mention, that Saint Laurent, because of also of its positioning and the fact it's a very urban brand, has been quite strong at developing an online business. In the online business, because more exposed to aspirational, has lost some -- has declined. Globally, across the brand, we can say, not specifically to Gucci, but it does cost us probably something like 4 points of growth because of the exposure to online. So it means that, in other words, without online, clearly, on the full price store, Saint Laurent will be positive in retail. So it's what I can say, and the fact that the brand is super strong in Western Europe and North America had an impact. That being said, the good thing I could mention is the fact that the brand has been very strong in Asia and in China. And we cannot really say that the brand has lost momentum in this region. The second point I would like to make about what is very positive and encouraging to us is the fact that the penetration of the brand in the top clients is accelerating. We help in that direction with ready-to-wear. Ready-to-wear is a category where clearly, we are able to engage with more elevated, more educated clients with a higher purchasing power. That's the reason why also we had a very strong fashion show, clearly showing our ambitions to continue to grow that category, which is instrumental to continue to penetrate further the top client segment. Second question about the deleverage at Gucci and the store network, sales density. As a reminder, first of all, it's always tricky to compare the brands in the industry because we have not necessarily the same square footage -- average square footage per store. So it's not because we have opened some points in the past few years with also the retailization, the conversion of some franchisee. That as -- there was a massive contribution of space expansion. Conversely, going forward, we don't expect massive retail expansion in the coming years. Rather, in some cases, a consolidation or relocation of some stores. We have mentioned Paris with the project at Faubourg Saint-Honoré that will be a landmark store for Gucci in Paris. But the expansion was part of the strategy of Gucci for several years, but with very selected openings. And we could envisage some reduction of point of sale in certain regions and in certain type of stores. When it comes to the sales density, I will let, first of all, the new management of Gucci work in order to decide what could be the next ambition. What I can tell you is that also with the elevation of the average in price, globally, the sales density has been not so much hit so far. Of course, there is an impact due to the traffic and the evolution of the top line. But we have been able in 2022 to come back at the level of '72, which is where we have room for improvement, clearly. But we have a starting point, which is, let's say, quite distant. When it comes to the -- your third question about the advertising and communication spend, yes, it's not something new that the cost to compete has increased massively in the industry. And as I already elaborated on, it's not only about advertising and communication. It's more broadly about how we engage with consumers, they need to invest in our stores, events in our stores, events or private events. So it's really about a 360 approach. And it has increased, indeed. Also, the digital communication is absolutely key. Even if it should -- the investment should not be skewed only towards digital communication. It does remain very important way to engage with consumers. And it has a cost also in terms of, let's say, it does also lead to an increase of the cost of information systems. So all in all, it's clear that there was an inflation. Could we say that we could see some moderation going forward? Of course, I won't comment about our competitors. That's not my job. What we told you already is that probably in that environment, the focus would be to insist and to focus on the return we can expect on our communication investments. When the industry was booming, it was probably less, let's say, need to look at this KPI even if it's always difficult to measure what the return of investment on this type of marketing investments. But clearly, we need to be more selective and to be sure that for the same amount of money, we can be more efficient in terms of impact, in terms of, let's say, brand awareness, brand equity building. And that's, I think, at least in our brands, it's what we will impose as a financial discipline, is just to be sure that we are investing in the right way.

The next question is from Charles-Louis Scotti with Kepler Cheuvreux.

I have 3 questions, please. The first 1, this is a follow-up question on your wholesale rationalization. If I understood correctly, you said it will be nearly down by midyear 2024. So is it fair to assume the same rate of wholesale decline in H1 next year? And in other words, what kind of retail penetration target do you have in mind for Saint Laurent and Balenciaga? On e-commerce, I'm not sure I understood you correctly, but did you say that fall in e-commerce sales had a 4 percentage point impact on your sales growth in Q3? And if I understood well, it means that e-commerce is down something like 25%, 30% in Q3. Is that correct? And third question on Kering Beauté. Can you help us quantify the upfront investment required to set up your in-house Beauty business? If I recall well, Dolce Gabbana say they're EUR 250 million of overall investment and nearly 250 hirings. So what kind of ramp up shall we expect? And should we expect those investments to drag on the profitability of the -- I don't know, Kering Eyewear and corporate divisions, if you include the Kering Beauté in this division going forward?

Hello, Charles-Louis. I'm going to take the first one. Yes, I mean, confirmation, you understood well on the wholesale, we should be a little bit more normative, sorry, starting from H2 next year. But it's a bit too early, sorry, to give you a magnitude of decline for H1 '24, so happy to follow up when we release the full year for this one.

And you understood very well, what I mentioned is the fact that if you look at the retail performance, look at the retail performance -- and it's an average for the group. It was not specific to Saint Laurent, and it can, of course, vary from 1 brand to another. But let's say that globally, the decline of e-commerce cost something like 4 -- 2, 3, 4 points of growth. And without the e-commerce, you would have performance with plus 3%, 4% compared to what is presented in terms of retail performance. Of course, the minus 25%, minus 30%, you have rapidly calculated. It's quite a fair estimate. Here again, it depends on the brand. It depends on the penetration of each brand in that segment. But let's guess. Let's have in mind that typically, so far, the e-commerce went back to something like 10% of the retail sales, 10% to 11% in terms of retail sales for the group as a whole. Of course, here again, we have some differences. Some brands have rather quite well resisted in terms of e-commerce performance, but because they were less penetrated. So that's more or less the average. And it does confirm that this was a channel more exposed to the aspirational clientele. And you won't be surprised if I tell you that Bottega Veneta, of course, has been less hurt than some of the brands because of the online business. When it comes to Kering Beauté, this is a start-up. This is a start-up business if we put aside Creed, and that's important to mention that. Of course, we will start with, as we mentioned before, Bottega Veneta, McQueen and Balenciaga, which were so far very small business. And it means that we are starting from a very low point in terms of top line. So you can imagine that at the beginning, there will be a lot of cost and not so much revenue. I won't quantify this. And clearly, the objective of Creed is that, of course, it will help to accelerate, but also to absorb some of these costs. As a reminder, Creed is a business of almost EUR 300 million of sales normalized with the integration of some distributors with a very high profitability. We have mentioned something between 40% and 50% of EBITDA margin or at least on a more normative level with some additional investments in terms of marketing. And of course, it will help us to also fuel the building, the setup of the Kering Beauté business that would be a loss-making company besides Creed during a few years until we have a sort of a critical scale to be able to absorb the cost of such a business.

The next question is from Rogerio Fujimori with Stifel.

Hi, Jean-Marc and Claire, I have 1 on Gucci and 1 on Balenciaga. I was wondering if you could talk about Gucci's strategy to retain its existing customers that are going to carry the brand through this transition phase until for about this new products start recruiting your customers next year progresses? And put differently, what you're trying to do to protect the customer rotation and avoid a bigger sales decline until Gucci has enough fashion innovative in-store? And then the second point on Balenciaga, I was just wondering if you could talk a little bit about the retail trends by nationality, particularly any light at the end of the tunnel for the American and the British nationalities? And could you confirm that Balenciaga outperformed the group's Chinese cluster growth in Q3?

Your first question is not an easy one, but at the same time, I would like to remind, if I look at the sales of leather goods in Q3 at Gucci, we are still running at something like 70% of carryover and evergreen products. So it means that, of course, you may have some clients who were absolutely completely in love with the Alessandro Michele design and aesthetic. But the major part of the clients, they are buying Gucci products and not Sabato De Sarno, Alessandro Michele or Frida products. And it's exactly what we are aiming at, is really to work on the brand in a way that people can come to buy Gucci products because they love the product, they love the brand, and they find top-quality products with a very good retail experience, and I invite you again to visit the new bond store in London and the Galleria store in Milan with a concept which is really Gucci, which is very luxurious and at the same time, very friendly. And it's really what we are targeting in terms of our strategy going forward in this transition phase. Of course, what I've mentioned before about the communication strategy at Gucci. It's also to continue to engage with a broad range of consumers, different profiles of consumers. And that's the reason why, let's say, that it will be clearly -- and it's a good question, a challenge for us in the coming months, but we think that we have the right setup. And looking at the retention we had during the Q3, we cannot really say that we saw some evolution that would be a problem to us. I think we kept a quite good retention. And conversely, we have been able to regain some new clients to recruit some clients. So let's say that so far, we are quite encouraged by what we observed in Q3. Balenciaga, maybe Claire will add some comments. But just to start with what we can say is that -- and maybe Claire will give some more color with some figures, but the trends were very strong in Asia Pacific. Across all the geographies, Japan, of course, but because benefiting from Asian tourists. And in all the nationalities obviously, have not been impacted at all by the controversy at Balenciaga last year. So the brand is really booming and is posting one of the best performances in the group in this region. Clearly, in Europe, even if we have started to see some signs of stabilization in Q2, Q3 has not been completely on par with our expectations. The same in the U.S., but with more something which is due to the market also. It's true also that in these markets, we have been quiet in terms of communication, even if we have resumed a lot of communication initiatives in the past few months. But globally, the tone was really low-key. And compared to our peers or some other brands in the group, clearly, we have not invested so much in this market. Also, in terms of products, we have not introduced a lot of newness considering the current situation of the brand in this market. And the lack of newness and new SKUs may have not helped so far. But obviously, we continue to believe that going forward, this controversy impact should become more and more mitigated in these key markets.

I think I don't have so much to add. I think in Europe, clearly, the U.K. was very challenging. And then overall, I mean, last year, you remember, it was before -- Q3 was before the controversy. So Europe was still benefiting from high level of tourist inflows, especially Americans. Obviously, the situation in Q3 this year was less supportive with tourists. And also some global softening, but this is across the board with the locals. And high comp, Jean-Marc mentioned, because we had a very successful bag launch last year. So all in all, yes, the situation is clearly more challenging in Europe. Whereas in the U.S., it's quite on par in Q3 with Q2 and no change.

The next question is from Carole Madjo with Barclays.

I have a few questions here, please. First question about Gucci. So when you talk about streamlining and focusing on better execution, would this also mean some change at the human resource level? So do you feel you have a strong team to meet all your new ambition, or should we expect you to make something as well on the employee headcount? That's the first question. Second one, also on Gucci, and this time on exclusivity. I think you mentioned that you wanted to also reduce your exposure to outlets going forward. Can you give a bit around that? Has this already started? Or should we expect less outlet stores in the upcoming quarters? That could be interesting. And just last question, to follow up on Balenciaga. So just to fully understand. So right now in the U.S. market and as well as in the U.K., so what is Kering doing to kind of solve this issue around this controversy? Is it mostly waiting to basically see this go away with time? Or are you also doing a bit more initiatives to make the consumers full backing of the brand. And also, last point, when do you expect now this to fully be behind us?

As you know, Jean-Francois joined Gucci only in July and Marco left just after the fashion show. So now, Jean-Francois is at full speed in terms of assessment of the quality of the organization. I think that to improve the execution of the strategy, first of all, I would like just to remind that the -- a lot of things have been done in the past few years under the helm of Marco Bizzarri. What we said is that in some areas, we need to accelerate and to speed up. I think 2 points. I think that we may see some other changes or some reinforcement in terms of structure. So we will -- we can expect in the coming months or the coming weeks on new hirings, new people joining the Gucci brand in order really to add some skills, some competencies, capabilities at Gucci level. It's not a complete reset of the organization. It's more about adding some talent here and there where we feel that there is a need. So you will see some new appointments going forward. And the other point I would like just to highlight is clearly that there will be probably some need to reinforce the structure in the regions or to have a better balance between the headquarter and the region in terms of relation, in terms of flexibility and alternately given to the regions. So -- but with nothing that will be noticeable in that way. We believe that we have also already some strong profile in most of the regions at Gucci. When it comes to exclusivity and distribution, yes, we mentioned in the past that clearly to enhance exclusivity, quality of the distribution while keeping an outlet distribution, which is obviously not so high in terms of contribution of sales and not so high in terms of number of units. But still, it's not what we are targeting in the long run. So we believe that we need to reduce the contribution of outlet to be even more exclusive. And when I was answering to the question of Edouard, that was a number of units, I was thinking also about the fact that going forward, there will be a reduction of number of units in terms of outlet distribution. But short term, you can imagine that even if we are working -- we have already worked to optimize the level of inventories because we have a transition and that we have still some old collections, there will be a need to keep for a certain period of time, the outlet distribution. And to -- and in some cases, that will be clearly limited, but also some margin activities in some stores just to manage properly the inventories also -- with the same objective also to be sustainable is a priority. That being said, in the future, we could start to see some consolidation in terms of number of outlets. Finally, when it comes to the question on Balenciaga, I think that it's not about just waiting. I think that we have been quite silent in terms of communication. Now we are coming back. There are some plans in 2024 to be more aggressive in terms of communication. By the way, the brand appreciation is still very high. We had a charity event in New York in September, and we had a lot of celebrities wearing Balenciaga even if it was in New York City, that we are bold enough to wear the latest creations of the [indiscernible]. So the brand appreciation is still very strong. So we will resume communication initiatives in 2024. We will inject some newness. We will increase the available -- the number of SKUs available in the stores. And part of the trends we see, obviously, have been self-inflected because we have not pushed so much the open to buy and the number of products available in the store, but I think it was the right time to digest in this key market this crisis. So no, we will be active, and we are not passive. And of course, we have plans to, let's say, rebound in 2024. Having in mind, of course, that it would depend on market conditions. It's something that we cannot really control. So we should remind you, we will take the last question.

The last question is from Piral Dadhania with RBC.

So I'll stick to 2. On Gucci, the Ancora collection coming early next year, I was just wondering how you plan to approach the distribution strategy for that given the soft traffic trends you're seeing in e-commerce. Will this product only be available in store to encourage customers to go into store? And then just in terms of the merchandising mix in store, could you perhaps just give us an indication of what proportion of product will be new, i.e., Ancora products versus existing. Just thinking about the evolution of the mix towards the new design aesthetic. And then maybe just like a slightly more medium-term question on that same point would be, over what sort of time frame do you expect Sabato De Sarno to be able to inject his vision into the more carryover part of the Gucci collection? Are we talking sort of 12 to 18 months? Or will it take even longer than that? And then my second question is just on category trends. I think you mentioned in your prepared remarks that jewelry grew by high single digit in Q3 within other Maisons. I'm just a bit surprised to see the strength in the jewelry category given where we are in the cycle. Could you maybe just talk about what drove that relative outperformance compared to some of your soft luxury brands? And just confirm that I understood that point correctly.

Let's start with the Ancora collection. We'll see early deliveries end of January in some key flagships with the selection of Luke's from the fashion show Silhouette. Collection will be formally launched mid-February with the fashion show collection in main store. And it will be expanded gradually in mid-March to the broader network for leather goods and shoes with all the commercial developments around the collection. And we'll then -- the gradual ramp-up will continue from April. That's about the -- the Ancora collection. And of course, we will continue to see some introduction of newness along the year. And by -- in Q4, of course, the offer in store will be all designed by Sabato De Sarno for the newest part. That being said, don't forget once again that we want to target steel, and that's always the objective to run at around 60% to 70% of carryover lines in handbags. It's slightly less, of course, in shoes and even less in ready-to-wear. Even if we will keep some iconic pieces of the previous collections in the offer, we are -- have insisted on the fact that we have now clearly installed a family of iconic lines: the Jackie; the [indiscernible] and the...

[indiscernible].

[indiscernible] sorry. And by the way, you will have noticed that already during the Ancora fashion show, there was quite good exposure of the Jackie bag, which is really what exactly I was mentioning before collection, which was -- or fashion show, which was both very creative, but also which was paying tribute to all the icons of the brand. So now clearly, to answer to your question, it means that by the end of the year, a big chunk of the offer will have been designed by Sabato De Sarno and the studio of Gucci, it's very important to me to remind that it's Sabato and the studio and also the work done by the merchandising director with our team to have also all the commercial developments around the collection. So let's say that by the end of the year, we will have made significant progresses. And it's for sure that in 12 to 18 months, which was the time horizon, you were mentioning this will be -- we will be at full speed with the Sabato De Sarno collection. Jewelry, just it's important to say that, as I mentioned, yes, jewelry brands delivered a very strong performance. I think that we have different situations, different because it's a brand in which we have invested a lot. And we saw a very good development in many markets. Qeelin for obvious reason because of its penetration in Asia. And clearly, Gucci -- Qeelin, sorry, has benefited from the rebound of the Chinese market, whatever the volatility of that rebound and some weeks, which were maybe weaker. But at the end of the day, overall, for Qeelin, it has been driven by the strong performance in China. That being said, also, you should remember that our brands, the jewelry brands are less exposed to the U.S. and clearly has not suffered from a slowdown of the U.S. market. But I think it's really the testimony of what we have started with our jewelry brands, which is about investment, expansion, creativity because our brand -- our jewelry brands are highly creative. It's really a brilliant alternative to some other peers' brands in many markets. So that does explain why our jewelry brands have been quite successful during this quarter, considering the current environment. So that was the last question. Thank you very much for being on our call, for all your questions. I think that we have taken the time to answer to most of your question and hopefully with sufficient clarity. Please note that we will report our 2023 full year earnings on February 8 before the market opens. And in the meantime, as always, Claire and her team remain available to answer any questions you may still have. We wish you a very nice evening.